Uncompleted contracts and Business Rescue


Uncompleted contracts and Business Rescue

A question in South African company law and practice which has not been determined by the South African courts since the inception of the Companies Act 71 of 2008 (“the Act”) is the detrimental effect of business rescue on contracts in terms of Section 136 (2) (a) of the Act. Once the business rescue procedure takes effect creditors, affected persons and stakeholders should understand the problems which they could encounter. The Act as it presently reads is uncertain and in dire need of an amendment which will limit the wide powers afforded to the business rescue practitioner. Creditors, affected persons and stakeholders need to be made aware of the power they are afforded in terms of the Act to object to the commencement of business rescue as soon as they are made aware of a resolution or court order to commence the procedure.


In Oakdene Square Properties (Pty) Ltd & Others v Farm Bothasfontein (Kyalami (Pty) Ltd & others; Farm Bothasfontein (Kyalami) (Pty) Ltd v Kyalami Events and Exhibitions (Pty) Ltd & Others (unreported case numbers 2011/35199 & 2011/24545 (ZAGPJHC), 17 February 2012 at paragraph 17, Classen J states “the power of a business rescue practitioner to suspend any obligation of a company that arises under an agreement is highly contentious. It may lead to “cherry picking” where the practitioner selects certain obligations best suited to the company for suspension.”


As stated above the detrimental effect of allowing the business rescue practitioner to “cherry pick” which obligations should be suspended in order to ascertain the best results for the financially distressed company may result in unilateral amendments to contracts which were found to be contrary in our common law. It is unlikely that affected parties will accept the wide discretion given to a business rescue practitioner to suspend part of their contracts for indefinite periods of time.


The Insolvency Act is not a codification of the common law of Insolvency, however it is based on our existing common law with certain modifications and may assist in providing some insight as too modifications which the Act requires. Although South African law is trying to move towards a fully functional business rescue procedure, parties may opt for the use of the Insolvency Act until the business rescue provisions have been clarified.


At common law it is important to note that a liquidator or trustee is not bound to perform unexecuted contracts entered into by an insolvent before insolvency unless he believes, as well as the general body of creditors that to continue with performance of the contract will be in the best interests of all of the creditors. Business rescue will differ in this regard as the practitioner will not look at interests of creditors and is solely focussed on the financially distressed company.


The main object of business rescue to see a better return for creditors has raised the bar to a substantial extent, however the Act fails to limit the extent to which the business rescue practitioner will go in order to gain a better return for creditors. C J Classen stated that: “ it appears that this goal is primarily directed at the prevention of unnecessary liquidations of companies and the consequent loss of its employees’ employment.”


In terms of the provisions of the Act, upon the commencement of business rescue proceedings, the business rescue practitioner may elect to suspend any obligation in terms of an existing contract which is a means to protect cash flow. The section is so wide that the business rescue practitioner is able to suspend provisions which he may dislike and implement provisions which he approves, the far reaching consequences of his discretion could include accepting a contractual term of the contract such as payment and ousting provisions which may cost the company money. Creditors, affected persons and stakeholders may in terms of Section 130 of the Act file an objection to a resolution to commence business rescue which is advisable as if they object to the resolution prior to a plan being implemented they may be able to alter the contents of the business rescue plan so that it is beneficial to them.


Business rescue has further introduced the concept of a general moratorium, this effectively will result in all legal proceedings against the company, or in relation to any property belonging to the company to be temporarily disallowed unless the business rescue practitioner or the court decides otherwise. The concept and practical application thereof pose difficulties in respect of uncompleted contracts. We have established that firstly, the business rescue practitioner can suspend any obligation in terms of a contract and secondly, that unless he agrees otherwise no remedy will be available for the innocent party. It appears that the business rescue practitioners will go to any end to attempt to rescue a perhaps already hopeless company resulting in a situation which could then place the innocent party in a cash flow problem.


The drafters of this provision should take into account the position illustrated by Potgieter JA in Goodricke & Son v Auto Protection Insurance Co Ltd 1968 (1) SA 717 (A) at 723 G and H,       “that a trustee who elects to abide by an executory contract entered into prior to insolvency cannot demand performance of any remaining obligations under the contract from the other party unless the trustee is prepared to perform in full and tenders complete performance of all the insolvent’s obligations, including unfulfilled past ones, under the contract.”

There must be a middle ground which is reached between the innocent party and the business rescue practitioner where at the commencement of business rescue one of two things must happen. The business rescue practitioner must decide whether or not to abide by the uncompleted contract in full or opt to cancel the contract, alternatively if he decides to suspend certain obligations the remaining contracting parties shall retain the right to claim damages from the company which are suffered as a result of the suspension or cancellation. In the event that the business rescue practitioner has elected not to suspend the Agreement the financially distressed party shall be obliged to perform in terms thereof.

The amendments which are necessary to reduce the drastic effects of the provision include limiting the discretion of the business rescue practitioner so that he must abide by the contract in full or repudiate the contract which will at the least allow affected parties a suitable remedy to the current state of affairs.


Michelle van Heerden

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